Topical Issues in Group InsuranceLIWMPC and SPC

12 September 2016

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This presentation does not constitute Actuarial Advice upon which to base decisions. No liability to any party will be accepted for the consequences of relying on this presentation.

• Greg Staunton – The QInsure experience

• Andrew Gill – Reinsurance: role and challenges

• Daniel Stone – Data Analytics in Group Insurance

• Panel discussion and Q and A

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Agenda: 12 September

GREG STAUNTON

The QInsure experience

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QInsure Drivers

• Regulatory requirement to cease self insurance by

30 June 2016

– Existing insurance split between self-insurance and external

insurance

• Choice of Fund and Open Fund changes likely

– Product review necessary

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The Journey

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Product design

Initial Business

Case1st RFP

Detailed Business

Case2nd RFP

Board Decision

Org. design & Co.

Establishment

Sept 2015

Initial licence

& AFSL

Applications

Dec 2016

Build Operations

Revised Licence

Application

May 2016

Licence Approval

1 July 2016

Go Live

To QInsure Decision

To QInsure Commencement

Key Guidance

Members’ best interests:

• SIS Act requirements regards insurance:

– Formulate, review regularly and give effect to an insurance strategy for

the benefit of beneficiaries of the Fund

– Consider the cost to all beneficiaries of offering or acquiring insurance of

a particular kind, or at a particular level.

– Only offer or acquire insurance of a particular kind, or at a particular level,

if the cost of the insurance does not inappropriately erode the retirement

income of beneficiaries

– To make an arm’s length decision to select the

insurance in the best interests of members; and

• SIS Act requirements regards investments – investments of a

superannuation entity to be made and maintained on an arm’s length basis.

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Interpreting Members best interests

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1. Product /Provider Assessment Criteria

2. Market Return Objective

Product designed to support strategic

objectives “Retirement Adequacy” philosophy

Value for Money, Stability and

Sustainability of Insurance Offer

Optimisation of the member experience

Assessing QInsure vs Insurers

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Assessment Criteria QInsure Ins 1 Ins 2

Risk assessment – capital ratio,takeover terms and client conflicts

Product features and conditions

Proposed service approach

Underwriting Management capability

Claims Management capability

Pricing and associated terms

OVERALL ASSESSMENT

Other Business Case Considerations

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• Enhancement of existing core capability required

• Investment return met members best interest

• Lower premium cost with similar capital risk to

external insurance

• external insurer loss/profit share arrangements

• Improved stability of price and enhanced product

development capability

• Reduced market constraints

Establishing QInsure – Lots to Do

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• QSuper existing insurance operation - 20 years

• Licencing – APRA and ASIC

• New Governance (Board, Risk and Conflicts of Interest)– Establish Company & new Board

– Board policies and guidelines

– Risk appetite statements and risk register

– Conflicts of interest

• Design/implement a new corporate structure – balance efficient integration with independence

– Enhance existing skills and build new skills

– End to end review and documentation of process

– Systems and Reporting

– Recruiting - without a licence

• Draft and implement commercial contracts

How did we get there

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• strong project & change management framework

• Great people - all hands on deck

• External consulting and other help

• Engagement with APRA and ASIC

– Early licence submission

– Dec 2015 operational review flushed out areas to address

– Prioritised and methodically addressed

• Necessary and sufficient for 1 July 2016 and then build

Selecting our Reinsurers

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• Low requirement for reinsurance – noting other benefits

• overlayed with capital, strategic and operational

impact

• SCOR - Group Insurance

– Aligned pricing assessment

– Full product support

– Strong alignment – u/w & claims management approach

– Low operational impact - processes and delegations

– U/w manual and other services

• Existing Lloyds catastrophe cover moved to QInsure

Retrospective

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• Market conditions drove the outcome

What went well What were/are the challenges

• APRA and ASIC engagement highly

proactive

• Strength of the business case options

assessment drove design and

delivery

• Assumptions based planning

allowed progress despite ambiguity

• Strong internal Program

Management with an effective

balance of internal resources with

external expertise

• Actuarial, Legal, Tax,

Reinsurance, Auditors, Specialist

consulting

• Transparency/engagement with and

support from insurers and reinsurers

• Timeline

• Managing competing priorities

• Managing ambiguity

• Balancing duplication of functions,

efficiency and independence

• Delivering necessary and sufficient vs

ideal target operating model

• Timing of recruitment without an

approved licence

• Contingency plan if capability could

not be delivered

ANDREW GILL

Reinsurance: role and challenges

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The Australian Group market is:

Challenging – product terms appropriateness / media scrutiny / reinsurer losses / uncertainty

Efficient – return of each dollar of member premium better than any other market

Paternalistic – performs a common good (the “Medicare of Life Insurance”)

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Setting the Scene

We as an industry should be proud of what the group market achieves but we must continue to work diligently to improve the

level of trust in the industry.

The role of reinsurers in the group market has changed over time:

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Role of Reinsurance

The role of reinsurers in the group market has changed over time:

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Role of Reinsurance

Pre-Apocalypse Characterised by:i) Highly commoditised market.

Price the key driver in decision making

ii) Perceived improving TPD experience

iii) Increasing benefit amounts resulting in enormous funds

iv) Stalled growth in traditional global reinsurance markets

v) Less engaged funds

Post-Apocalypse Characterised by:i) Greater value placed on

sustainable termsii) Greater focus on operational

expertiseiii) Review of product definition

changesiv) Tepid reinsurance market –

significant caution around TPDv) Very engaged funds

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Role of Reinsurance (cont’d)

Pre Apocalypse Post Apocalypse

Least Important

Most Important

Capital Pricing Expertise / Validation

Claims Support

Underwriting Support

Volatility Management

What do insurers value from their reinsurers?

Price Competitiveness

What do insurers and trustees value from their reinsurers?

CapitalPrice Competitiveness

Claims Support

Volatility Management

Underwriting Support

Experience Monitoring

Pricing Expertise / Validation Product Support

Product Support

Role: Price Taker Role: Value Adder

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The Challenge for Reinsurers

“Reinsurance cycles” are common in markets that are price-driven and with regular tenders

Reinsurers often end up at bottom of “food-chain”

The challenge for reinsurers is to meet shareholders return expectations in a very competitive, but large market.

Source: Reinsurer Financial Reports 2000 - 2015

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The Challenge for Reinsurers (cont’d)

How?

By developing a proposition that delivers additional value to the propositions of insurers and trustees

Sustainable pricing and product terms that aim to achieve a reasonable return on invested capital

Super returns / sub-standard returns are not-sustainable

The challenge for reinsurers is to meet shareholders return expectations in a very competitive, but large market.

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The Challenge for Reinsurers (cont’d)

What are the key obstacles to success? Rebuilding trust in reinsurers as “trusted advisers”

Increasing appetite of insurers and funds for insurance risk

A return to unsustainable pricing (high and low) and product terms Undisciplined pricing / “emotive pricing”

Role of non-regulated “off-shore” reinsurance

Lack of data to enable us and the industry better understand the underlying risks

Forgetfulness

“History doesn't repeat itself, but it does rhyme” – M Twain

DANIEL STONE

Data Analytics in Group Insurance

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Group Data Dilemma & enrichment

Status

Fund Member data

Claims data

ABS Census data

Custom census data

What can we do with this…

Targeting Needs Voluntary propensity

Risk analysis Data checks Benefit design

Claims analytics

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Risk insights

• Segmental analysis of claims by

fields in membership

• IP Salary vs cover under/over

insurance

• Analyse impact of new designs

in data

Claims insights

• Deep dives into claims

• Prediction of length of IP claim

Campaign analytics

• Customise propensity model

• Used in targeted campaigns

• Campaign analytics

• Refine model

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Risk based on where you live

An IRSAD score of less than 1,000 attracts a higher insurance risk and above

1,000 a lower insurance risk.

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Data checks & product designCalculate Salary

• Using SG Contribution

• Using Census data based

on postcode, age, gender

• Allow for salary inflation

• Validate data & backfill

Affordability

• Use calculated salary

• Consider individual

(scatterplot) and

aggregate (fund view)

affordability

• Relationship between

salary and fund balance

by age

Fund penetration & Targeting

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Automated Needs analysis

Insurance needs

PV of future

expenses

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Note: Based on Household Expenditure Survey (2009/10) and the ABS Household Income and

Distribution Survey (2009/10)

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Underinsurance visualisation

Illustrative example: map of underinsurance by area and factors

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Voluntary Propensity & targeting

Claims analytics visualisation

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Panel Discussion and Q & A

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